WASHINGTON (Reuters) — The leaders of
the Senate Banking Committee on Tuesday announced an agreement on
legislation to wind down government-owned mortgage financiers Fannie
Mae and Freddie Mac, jump-starting a long-standing debate that could
still take years to resolve.

Committee Chairman Tim Johnson, a Democrat, and Senator Mike Crapo,
the panel's top Republican, outlined the plan in bullet point format
after months of talks that included input from the Obama
administration. They said they intended to introduce a bill soon,
with an eye to having the panel vote on it within weeks.

Fannie Mae and Freddie Mac, which own or guarantee 60 percent of all
U.S. home loans, provide a steady source of mortgage funds by buying
loans from lenders and packaging them into securities they sell to
investors with a guarantee.

Their central role in the mortgage market led the government to bail
them out to the tune of $187.5 billion in the midst of the 2007-2009
financial crisis, and lawmakers want to make sure taxpayers are
never on the hook again.

Under the outline from Johnson and Crapo, private interests would
take the first 10 percent of any mortgage losses, before an
industry-financed government backstop would kick in.

"This agreement moves us closer to ending the five-year status quo
and beginning the wind down of Fannie and Freddie, while protecting
taxpayers," Crapo said in a statement.

Analysts cautioned, however, that the lawmakers face an uphill
battle in trying to enact legislation this year. Any bill that
clears the Democrat-led Senate would have to win approval in the
Republican-controlled House of Representatives, where some lawmakers
want a fully private system.

"This is another step towards reform, but we are still years away
from having either the legislative capacity or market willingness to
embrace a new mortgage finance system," said Isaac Boltansky, a
policy analyst with Compass Point Research and Trading.

SHRINKING THE MARKET?

Under the proposal, Fannie Mae and Freddie Mac would be wound down
and replaced with a new government reinsurer called the Federal
Mortgage Insurance Corp. The new entity, which would be funded by
user fees, would issue a federal guarantee for mortgage bonds that
would kick in only after private creditors had taken a hit.

Included in the outline is a mandate that strong loan underwriting
standards be built into the new system.

It would also require a 5 percent downpayment for all but first-time
buyers, although that requirement would be phased-in over time. Some
consumer and housing advocates worry that a system with rigid
downpayments will prevent less affluent Americans from accessing
credit.

"There is near unanimous agreement that our current housing finance
system is not sustainable in the long term and reform is necessary
to help strengthen and stabilize the economy," said Johnson. "This
bipartisan effort will provide the market the certainty it needs.

Fannie Mae and Freddie Mac play a huge role in keeping borrowing
costs low for homeowners, and the guarantees they provide investors
are the main reason Americans are able to secure 30-year fixed-rate
mortgages.

Whether enough private capital would flow into the market to fully
replace their footprint is uncertain. Some analysts said placing
more of the burden of losses on private investors would lead to a
shrinking of the $10 trillion U.S. mortgage market.

"The Johnson-Crapo bill means a redesigned, smaller U.S. mortgage
market because it takes a tough stand on taxpayer protection," said
Karen Shaw Petrou, managing partner of Federal Financial Analytics.

The outline from the two senators said they plan to eliminate
affordable housing goals that Congress had given Fannie Mae and
Freddie Mac. Instead, they would establish housing-related funds to
ensure the availability of affordable rental properties. These funds
would be financed through a user fee on lenders that seek government
backing for their loans.

To ensure community banks are not squeezed out of the system, the
senators said they would seek to establish a "mutual cooperative
jointly owned by small lenders" to offer a cash window for eligible
loans while allowing the institutions to retain mortgage servicing
rights.

Fannie Mae and Freddie Mac were seized by regulators in 2008 as loan
defaults drove them toward insolvency. But they have since returned
to profitability and have returned $202.9 billion in dividends to
the U.S. Treasury for the controlling stake the government took when
it bailed them out.

Private shareholders, including Perry Capital and Fairholme Capital
Management, have sued the United States over bailout terms that
prevent the companies from using their profits to buy back the
government's shares.

Johnson and Crapo did not outline how they believed these private
shareholders should be handled. The preferred shares of the two
companies, which have been trading at their highest levels since
2008, fell sharply on Tuesday.